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Strategic Business Reporting (SBR)
1
Revising for the September
2020 exam session
Part 3
Strategic Business Reporting (SBR)
Due to the change in timing of the ACCA exams, there are now a few extra weeks before the next exam session. With this in mind, the SBR examining team highlight a few areas of the syllabus that have caused candidates problems in recent exams and give some pointers on exam techniques, specific IFRS standards and current issues.
Strategic Business Reporting (SBR)
2
Contents
Introduction.......................................................................................................... 3
Asset ceiling test IAS 19 ..................................................................................... 4
Illustrative example.......................................................................................... 5
Suggested answer........................................................................................... 5
Understanding the context of Initial Coin Offering (ICO) tokens ....................... 7 Non-GAAP/non-financial performance measures and quarterly press releases
............................................................................................................................. 9
Strategic Business Reporting (SBR)
3
Introduction
This article is the third in a series which aims to help those SBR candidates who are studying for the September 2020 exams, but also beyond that. Specifically, it explains a complex area of the SBR syllabus, the asset ceiling test in IAS 19 Employee Benefits, and explains how many IFRS standards and principles might be relevant to an accounting issue for which there is no existing IFRS standard (in this case Initial Coin Offering (ICO)). Finally, it examines some non-financial performance measures that have been reported in practice in a global digital entity. However, first it is worth reiterating that candidates will not be able to successfully answer SBR questions by rote learning and reproducing textbook answers. Candidates should always explain the relevant principles which underpin their answers because in SBR, marks are awarded first for an explanation of the principles and then for their application to the scenario. An understanding of the principles will allow candidates to deal with the many accounting issues that arise in practice and to cope with the changes and candidates will not be awarded professional marks if there is no reference to the scenario.
Strategic Business Reporting (SBR)
4
Asset ceiling test IAS 19
Defined benefit pension accounting is generally acknowledged to be a complex area of accounting and asset ceiling test is possibly one of the more complex aspects of IAS 19 Employee Benefits that might be examined. A pension asset exists when a defined benefit pension plan has a surplus of plan assets over its liabilities. IAS 19 requires the employer to consider the recoverability of any such surplus and there must be economic benefit (for example reduced contributions or a cash refund) available to the company to enable this recovery. An entity should recognise a net pension asset in such cases because the entity controls a resource, and that control is a result of past events. This is in the form of contributions paid by the entity and service rendered by the employee. Future economic benefits are available to the entity in the form of a reduction in future contributions or a cash refund, either directly to the entity or indirectly to another plan in deficit. The asset ceiling is the present value of those future benefits. IAS 19 states that, when an entity has a surplus in a defined benefit plan, it should measure the net defined benefit of the asset at the lower of: i) the surplus in the defined benefit plan; and ii) the asset ceiling, Note: the asset ceiling will be provided as part of the question scenario in the SBR exam but in practice is determined using the discount rate based upon market yields at the end of the reporting period on high quality corporate bonds A further issue can arise when a plan amendment, curtailment or settlement occurs. An entity should recognise any past service cost, or a gain or loss on settlement in profit or loss. In doing so, the entity should not consider the effect of the asset ceiling. After the plan amendment, curtailment or settlement has been accounted for, the entity should then determine the effect of the asset ceiling. A plan amendment, curtailment or settlement might reduce or eliminate a surplus, which could impact on how the asset ceiling is measured. Any changes in the value of the asset ceiling is recognised in other comprehensive income, as opposed to being recognised in the statement of profit or loss.
Strategic Business Reporting (SBR)
5
Illustrative example
Apolline Co manages a defined benefit scheme for its employees. At 1 January 20X8, the fair value of the pension scheme assets were estimated to be $137 million and the present value of the pension scheme liabilities were $122 million. The asset ceiling has been calculated at $4 million. The discount rate on high quality corporate bonds is 4%. The following are the details of the scheme for the year to 31 December 20X8. $m
Cash contributions 7
Benefits paid 6
Current service cost 5
At 31 December 20X8, the asset ceiling has been calculated at $11 million. During the year, there was a scheme curtailment which resulted in a gain on settlement of $3 million. Immediately after the scheme curtailment the actuary $136 million.
Suggested answer
At 1 January 20X8, the surplus of the scheme/net plan asset is $15 million ($137million - $122million). However, the asset ceiling is $4 million so the net defined benefit pension asset is restricted to this figure. Interest on the opening asset will be based upon this figure at $160,000 (4% X $4 million) and will be recorded in profit or loss. The cash contributions of $7 million will be added to the scheme assets, and the current service cost of $5 million charged to profit or loss. The benefits paid of $6 million are deducted from both the schemes assets and the schemes liabilities and therefore have a nil effect. As any past service cost does not consider the effect on the asset ceiling, a gain on settlement of $3 million should therefore be recognised in profit and loss.
Strategic Business Reporting (SBR)
6 The pension scheme surplus at 31 December 20X8 is summarised as follows:
Assets ($m) Liabilities
($m)
Net plan
asset before ceiling adjustment ($m)
Ceiling
adjustment ($m)
Net plan
asset after ceiling adjustment ($m)
Balance 1
January 20X8
137 122 15 (11) 4
Net interest at
4% 5.48 (4% x $137m) 4.88 (4% x $122m)
0.6 (0.44) 0.16
(4% x $4m) Cash contributions
7 7 7
Benefits paid (6) (6) -
Current service
cost
5 (5) (5)
Curtailment and
settlement (3) 3 3
Total at 31
December 20X8
143.48 122.88 20.6 (11.44) 9.16
At 31 December 20X8, the scheme is now valued at the lower of the: surplus of the scheme, $12 million ($148million - $136million) and the present value of the economic benefits in the form of refunds from the plan or reductions in the future combinations (the asset ceiling) i.e.$11 million. This means that there is a net gain of $1.84 million being the difference between the net plan asset in the scheme ($9.16 million) and the asset ceiling ($11 million). This gain is credited to other comprehensive income. If the effect of the asset ceiling had not been taken into account, there would have been a remeasurement loss of $8.6 million ($20.6million-12million) at 31 December 20X8 which would have been recognised in other comprehensive income.
Strategic Business Reporting (SBR)
7 Understanding the context of Initial Coin Offering (ICO) tokens SBR will often provide candidates with a scenario that they have not encountered before. These scenarios allow candidates to demonstrate their ability to apply accounting principles and show how more than one IFRS standard might be relevant. The next few paragraphs use an ICO to demonstrate how candidates should use accounting principles (such as control) and existing IFRS standards to suggest potential accounting treatments. participants participants often pay in cryptocurrency. They are similar in many ways to .e. the tokens. The tokens are a digital asset based on the same logic as cryptocurrencies, like Bitcoin. Although the tokens have no inherent value, if the ICO is successful, these new tokens will become valuable and a market to trade them will subsequently develop. If unsuccessful, then the tokens would have no value. proposed venture. This may be the development of a new app or product or service; for example, the development of an app to subsequently support the trade of the tokens. The tokens are usually issued in exchange for either conventional currency or cryptocurrency. As the ICO issues a token, rather than shares, they are not considered to be a securities offering, so the associated regulation and controls have not been applied. There are ethical issues for accountants because the white paper may not properly represent the nature of the offer. For example, unrealistic forecasts or factual inaccuracies. During the preparation for the ICO, the costs should be recognised as assets in accordance with IAS 38 Intangible Assets. Following the circulation of the tokens, the issuing company generally loses control of the market of these tokens. However, if the issuer is able to get further economic benefits from token holders by providing them with intermediary or similar services that are not related to the subsequent sale of uncirculated tokens, then the costs may satisfy the requirements of IAS 38. Examples may be the management of the platform supporting the market of circulated tokens by annulling purchased tokens or changing the content of smart contracts (a computer program that executes, controls and documents legal events). If all inflows received for tokens are in excess of the expenses of the initial ICO and are not related to further commitments to holders of tokens, such further inflows are considered as revenue by the issuer. Sometimes the rights given to the token holders may be similar to the rights of the holders of debt, equity instruments or other financial instruments. For example, the issuer may contract to pay a fixed amount of annual profits to the token holder but not to redeem the tokens. At the initial recognition, such a
Strategic Business Reporting (SBR)
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